Thu. Jan 20th, 2022


Private equity may have just picked out another UK institution. The way London’s elite law firms pay their partners is changing. The era of pure lockstep – a system where partners’ pay is determined by service time, not performance – is almost over.

The shift is years in the making. But an announcement from New York’s Cravath, Swaine & Moore shows it this time is different. The firm originated the model almost 50 years ago. Meanwhile, the Magic Circle has become synonymous with it. In December, Cravath dropped it. Days later, Linklaters announced changes to his lock, to Clifford Chance, Freshfields and Allen & Overy.

It is fitting that a decision by a US firm serves as a marker for change in London’s elite legal market. Because it is the private equity-driven expansion of American firms to London that has brought time to the Magic Circle’s defining pay structure. Of the City’s top level, only Slaughter and May (where I worked as a junior) kept the model intact.

The seemingly encouraging collegiality lock-in step has been a recruiting tool for the City’s local firms in an increasingly challenging market. Lockstep provides security. Stay, play nice, and you will earn more. Although some American outfits – Cravath among them – also adopted lockstep, the more expansionist paid for performance offered. For the Magic Circle, collegiality was a distinguishing factor in their home market.

London’s final step has indeed been threatened by tampering for decades. City firms’ own government building eroded it in the early 2000s. The opening of less profitable offices in remote jurisdictions has strained a system that, in its strictest form, requires everyone of the same seniority to be paid the same.

But while partnerships have adapted and created local profit pools, the system has remained in the Magic Circle with surprisingly few material changes. In 2005, when Clifford Chance voted on variable pay by region, my colleague John Gapper predicts “It can not be long before City firms pay partners according to their value as individuals”.

“Unless they do, they will lose a lot of talent” to more lucrative U.S. competitors, he said. The firms offered great resistance, amid considerable internal tension. They lost a lot of talent.

What has changed in the 17 years since then is the scale of the threat in the UK. In the last decade or so, the private equity boom has changed the legal market on both sides of the Atlantic.

The flow of private equity transactions has financed exponential expansion at both Kirkland & Ellis and Latham & Watkins, with its high-yield securities expertise. They used the lucrative stream of work to fund expansion into other practice areas and countries. Both are now power stations of City M&A work.

It also boosted the value of individual lawyers turbo. The US firms have hired virtually all the top-level private equity lawyers in London. It has hit London partnerships like Freshfields, with respected private equity teams vulnerable to poaching, and has had a ripple effect among other dealmakers.

And while traditional blue-headed clients wanted a one-stop shop for their transaction advice, private equity groups proved more flexible. This has enabled the American law firms they advise to avoid less profitable specialists – for example, employment advice – which deducts rainmakers’ salaries in a lock system.

Clearly, there are other factors at play. U.S. firms have also dropped lockstep. Changing cultural norms means fewer employees (and even partners) are expected to stay with the same employer for life.

Companies have not completely abandoned lockstep. Most include an element of seniority-based payment. A few surprisingly lucrative anachronisms like Wachtell, Lipton & Katz in New York and Slaughters in London continue. They opposed overseas expansion. Elsewhere, loosening the lock step is relentless.

The private equity boom will (probably) fade. U.S. practices in the City could then recede; partners can return to the Magic Circle firms they fled. Yet a more restless culture will continue. So too will years of bitterness between those who feel they are being underpaid and their seniors. Companies will have to show creativity in pay more than ever.

cat.rutterpooley@ft.com

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